February 03, 2018
The stock market tumbled by 2.0 percent on Friday. Given that the top 1.0 percent hold a grossly disproportionate share of stock wealth, this means they took a big hit. Are we more equal as a society now?
Those who like to focus on wealth measures on inequality would have to say yes. And if the market continues to fall (not a prediction, but it certainly is possible that the correction will continue) then we will see a further gain on the inequality front. Suppose it falls 30 to 40 percent, bringing price-to-earnings ratios closer to historic averages. Will the country then look much different than it does today?
I’m inclined to say no, at least if the distribution of income has not changed. To my view, the major story on inequality over the last four decades has been the more than doubling of the share of income that goes to the 1.0 percent, from less than 10 percent in the 1970s to slightly more than 20 percent today. The top 0.1 percent have been the biggest gainers in this picture.
Wealth has not always followed the same pattern since so much of the wealth of the rich is tied up in stock. We had two big plunges in the stock market during this period, 2000 to 2002, when it fell by more than half, and again between 2007 and 2009. It’s hard to see how the poor and middle class were doing any better at these troughs in wealth (2002 and 2009) than they were when wealth was at its peaks before the crashes.
It’s not even clear there were any relative gains. Bill Gates and Warren Buffett surely had no problems buying whatever they might have desired in 2002 or 2009.
Apart from the sharp fluctuations, the meaning of wealth as a measure of inequality is problematic. Wealth does, in principle, give its holder claims to the economy’s resources, but there are some important issues here. Suppose the richest one percent decided to spend their whole income this year, next year, and the year after, as opposed to saving 20 or 30 percent (something like estimated savings rates).
There is no economic reason this could not happen. It would increase demand in the economy, possibly leading to inflation and higher interest rates, but there is no doubt they would be able to buy goods and services that corresponded to their income.
Suppose the rich decided to spend 100 percent of their wealth over the next three years. This would mean a massive selloff of stock and bonds. This selloff would cause the value of these assets to plummet, which means that the wealth they would be able to translate into goods and services would be hugely less than their wealth was before the selloff. Of course, any individual rich person probably could dump their assets without affecting the whole market, but if we’re talking about a class, this is not true.
For this reason, I think those concerned about inequality should keep the focus on income, not wealth. It’s fine to celebrate Friday’s drop in the Dow, but this is not going to help people in the middle and bottom unless they see gains in income shares, even though their wealth share has risen.
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